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Outpost Capital Management LLC v. Prioleau

United States District Court, D. South Carolina, Charleston Division

November 16, 2017

Outpost Capital Management, LLC, and Bill Laggner, Plaintiffs,
v.
Robert Prioleau, as Manager of HMB Ventures, LLC; HMB Ventures, LLC; and Halsey Minor, Defendants.

          ORDER AND OPINION

          Richard Mark Gergel United States District Court Judge

         This matter is before the Court on Defendant Robert Prioleau's motion to dismiss for failure to state a claim (Dkt. No. 42) and Defendants HMB Ventures, LLC's and Halsey Minor's motion to dismiss for lack of personal jurisdiction, lack of service, improper venue, and failure to state a claim (Dkt. No. 43). For the reasons set forth below, the Court grants Mr. Prioleau's motion to dismiss and grants HMB Ventures and Halsey Minor's motion to dismiss.

         I. Background

         Halsey Minor, a resident of California, founded Uphold Ltd. (originally named BitReserve, Ltd.), a digital currency business. After an October 2013 meeting in Charleston, South Carolina, Mr. Minor established BitReserve, Ltd., a Cayman Island's corporation, as a holding company that would operate through United States-based subsidiaries. Mr. Minor served as the chairman of BitReserve, Ltd.'s board and became Chief Executive Officer shortly after its formation. Mr. Minor undertook an evaluation process to determine which states would have the most favorable regulatory environment for the planned operating subsidiaries. He determined that South Carolina provided a favorable regulatory environment for Uphold's operations, and he decided to incorporate BitReserve HQ, Inc. (Uphold's operating subsidiary), in South Carolina.

         Mr. Minor had a prior personal bankruptcy, which created regulatory issues, so he created a voting trust for his Uphold shares, with a trustee having independent authority to vote the shares. In 2015, Mr. Minor allegedly met an old high school friend, Robert Prioleau, in Charleston, South Carolina, about serving as the trustee. Mr. Prioleau agreed to serve as trustee. Mr. Minor then established HMB Ventures, LLC to hold the shares. Mr. Minor was the sole member of the LLC and Mr. Prioleau the sole manager. The agreement stated the manager had "sole, complete and unrestricted right to vote" the shares held in HMB Ventures. (Dkt. No. 46-12 at 4.) It also provided that Mr. Minor retained the right to sell or convey any shares held by HMB Ventures and that Mr. Minor could replace the LLC manager with another independent person at any time for any reason. (Id. at 4-5.) Plaintiffs allege the voting trust was a sham and that Mr. Minor in fact controlled the voting of the shares.

         In 2016, Plaintiffs, Mr. Minor, and (allegedly) Mr. Prioleau entered into a stock purchase, transfer, and voting agreement (the "Share Transfer and Voting Agreement"). The Share Transfer and Voting Agreement called for the transfer of 4, 843, 890 shares to each of the Plaintiffs (totaling 9, 687, 780 shares) for nominal consideration on the date that Uphold's board "approves such company's next financing, " which is a condition precedent. Defendants assert the purpose of the agreement was to transfer shares in exchange for financing from Plaintiffs for Uphold. Despite having divested his right to vote his shares to a voting trust, Mr. Minor also agreed "to vote his and any of his affiliates remaining shares in BitReserve Ltd. according to the vote recommended by the majority of the Board of Directors of BitReserve, Ltd. until such time as BitReserve has completed a financing raising at least $15mm at a pre-money valuation in excess of $85mm." (Dkt. No. 46-16 at 2.) On June 28, 2016, Minor allegedly instructed Mr. Prioleau to sign the Share Transfer and Voting Agreement, since Mr. Prioleau allegedly had the sole authority to transfer the Shares. Mr. Prioleau signed the Share Transfer and Voting Agreement and agreed to "fulfill its terms as to the shares and the seller in my capacity as trustee and acknowledge full receipt of the consideration paid for said shares." (Id. at 4.) Plaintiffs allege Uphold's board approved the financing agreement with Plaintiffs on July 30, 2016. Defendants assert Uphold's board rejected the financing agreement. There is no allegation that Plaintiffs actually provided any financing.

         On November 18, 2016, Plaintiffs sued Mr. Prioleau, alleging breach of contract and seeking specific performance of the share transfer. Mr. Minor responded by terminating Mr. Prioleau from HMB Ventures. Plaintiffs then amended the complaint, adding HMB Ventures and Mr. Minor as Defendants and asserting additional causes of action for civil conspiracy and breach of contract accompanied by a fraudulent act. Mr. Prioleau moved to dismiss for failure to state a claim, and Mr. Minor and HMB Ventures moved to dismiss for lack of personal jurisdiction. The Court ordered jurisdictional discovery, now complete, after which Defendants renewed their motions to dismiss.

         II. Legal Standard

         A. Motion to Dismiss for Lack of Personal Jurisdiction

         When a court's personal jurisdiction is challenged, the burden is on the plaintiff to establish that a ground for jurisdiction exists. Combs v. Bakker, 886 F.2d 673, 676 (4th Cir. 1989). When the court resolves the motion on written submissions (as opposed to an evidentiary hearing), the plaintiff need only make a "prima facie showing of a sufficient jurisdictional basis." Id. However, the plaintiffs showing must be based on specific facts set forth in the record. Magic Toyota, Inc. v. Se. Toyota Distribs., Inc., 784 F.Supp. 306, 310 (D.S.C. 1992). The Court may consider the parties' pleadings, affidavits, and other supporting documents but must construe them "in the light most favorable to plaintiff, drawing all inferences and resolving all factual disputes in his favor, and assuming plaintiffs credibility." Sonoco Prods. Co. v. ACE INA Ins., 877 F.Supp.2d 398, 404-05 (D.S.C. 2012) (internal quotation and alteration marks omitted); see also Carefirst of Md., Inc. v. Carefirst Pregnancy Ctrs., Inc., 334 F.3d 390, 396 (4th Cir. 2003) ("In deciding whether the plaintiff has made the requisite showing, the court must take all disputed facts and reasonable inferences in favor of the plaintiff"). However, a court "need not credit conclusory allegations or draw farfetched inferences." Sonoco, 877 F.Supp.2d at 205 (internal quotation marks omitted).

         However, "[i]f the jurisdictional facts 'are so intertwined with the facts upon which the ultimate issues on the merits must be resolved, ' then '"the entire factual dispute is appropriately resolved only by a proceeding on the merits.'" United States ex rel. Vuyyuru v. Jadhav, 555 F.3d 337, 348 (4th Cir. 2009) (quoting Adams v. Bain, 697 F.2d 1213, 1219-20 (4th Cir. 1982) (citation omitted) (regarding subject-matter jurisdiction). In such case, a district court may assume jurisdiction, reserve the question of jurisdiction, and determine relevant jurisdictional facts on a motion going to the merits or at trial. See United States v. North Carolina, 180 F.3d 574, 580 (4th Cir. 1999) (regarding subject-matter jurisdiction).

         To meet their burden, Plaintiffs must show (1) that South Carolina's long-arm statute authorizes jurisdiction, and (2) that the exercise of personal jurisdiction complies with the constitutional due process requirements. E.g., Christian Sci. Bd. of Dirs. of First Church of Christ, Scientist v. Nolan, 259 F.3d 209, 215 (4th Cir. 2001). South Carolina has interpreted its long-arm statute to extend to the constitutional limits of due process. See S. Plastics Co. v. S. Commerce Bank, 423 S.E.2d 128, 130-31 (S.C. 1992). Thus, the first step is collapsed into the second, and the only inquiry before the court is whether the due process requirements are met. ESAB Group, Inc. v. Centricut, LLC, 34 F.Supp.2d 323, 328 (D.S.C. 1999); Sonoco Prods. Co. v. Inteplast Corp., 867 F.Supp. 352, 352 (D.S.C. 1994).

         Due process requires that a defendant have sufficient "minimum contacts with [the forum] such that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice.'" Int'l Shoe Co. v. Washington, 326U.S. 310, 316 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940)). This standard can be met in two ways: "by finding specific jurisdiction based on conduct connected to the suit or by finding general jurisdiction." ALS Scan, Inc. v. Digital Serv. Consultants, Inc., 293 F.3d 707, 711-12 (4th Cir. 2002) (citing Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414 (1984)). Plaintiffs do not claim that the Court has general personal jurisdiction over Defendants HMB Ventures and Halsey Minor. To determine whether specific jurisdiction exists, the Court considers "(1) the extent to which the defendant has purposefully availed itself of the privilege of conducting activities in the state; (2) whether the plaintiffs' claims arise out of those activities directed at the state; and (3) whether the exercise of personal jurisdiction would be constitutionally 'reasonable.'" Carefirst of Md., 334 F.3d at 397 (citing ALS Scan, 293 F.3d at 711-12; Helicopteros Nacionales de Colombia, 466 U.S. at 414 & n.8). In other words, the defendant must have "minimum contacts" with the forum, see Burger King, 471 U.S. at 471-76, the cause of action must arise from those contacts, and the exercise of personal jurisdiction must be reasonable. Courts evaluate the reasonableness of personal jurisdiction by considering "(a) the burden on the defendant, (b) the interests of the forum state, (c) the plaintiffs interest in obtaining relief, (d) the efficient resolution of controversies as between states, and (e) the shared interests of the several states in furthering substantive social policies." Lesnick v. Hollingsworth & Vose Co., 35 F.3d 939, 946 (4th Cir. 1994). "Minimum contacts" and "reasonableness" are not independent requirements; rather, they are aspects of the requirement of due process, and thus "considerations sometimes serve to establish the reasonableness of jurisdiction upon a lesser showing of minimum contacts than would otherwise be required." Burger King, 417 U.S. at 477.

         B. Motion to Dismiss for Lack of Service

         Under Rule 12(b)(5) of the Federal Rules of Civil Procedure, a defendant can move to dismiss a complaint where service of process failed to comply with the requirements of Rule 4 of the Federal Rules of Civil Procedure. Rule 4(m) requires service of process within ninety days after the complaint is filed. If service does not occur within that period, the court must dismiss the action unless the plaintiff shows good cause for the failure, in which case the court must extend the time for service. Fed.R.Civ.P. 4(m).

         C. Motion to Dismiss ...


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